How the Internet is Killing Culture (and why Blockchains Will Save It)

When Johannes Gutenberg cast the final piece of the world’s first lead-based typecast, he unleashed a cascade of events that would utterly transform the humanities. The invention of the mechanical printing press democratized information and served as a catalyst for the flourishing of culture throughout the Renaissance, Reformation and Enlightenment.

Similarly, many predicted that the internet would spur an analogous coup. Unfortunately, one has yet to emerge, and there are many reasons to believe that the web is actually hurting the arts.

The Digital Revolution Has Created Numerous Challenges for the Creative Economy…

There’s no denying that the proliferation of the internet has spawned numerous advantages for society — it’s led to an unprecedented sharing of knowledge, connected billions of people and revolutionized dozens of industries. It’s also been a boon to the media consumer, allowing users to watch what they want, when they want and how they want.

But these benefits belie a dark secret — the digitization of content has also carved a swath of destruction across the media value chain. While we’ve seen this force devastate numerous corporations in the industry — studios have seen broadcasting revenues stagnate, record labels have eliminated thousands of jobs and countless newspapers have gone bankrupt– the artists themselves (especially independent ones) have taken the brunt of the damage.

Consider the plight of the recording industry over the past 20 years — At the turn of the century, a musician could expect to earn over $1.20 for each CD she sold (and that is with the 47% cut taken by her label). But entrance of digital distributors such as Spotify has now plunged this share to between $0.006 and $0.0084 per stream (and this is an average — independent artists who lack the leverage of an established brand and label support often fare much, much worse).

Figure 1: Music Revenue Has Nearly Halved in the 21st Century

Source: Talking New Media

And while the effects of the internet on the recording industry is probably the most well-known warning, the consequences of digitization are by no means limited to music — movie producers, publishers and game developers have also complained that they’re no longer capturing fair value for their work.

In particular, the rise of the internet has created three new challenges for artists:

In short, while the ubiquitous availably of content may have increased the public’s appetite for music, television, films, journalism and gaming, the form of digital distribution has all but destroyed the market for these art forms.

…but Blockchains Have the Potential to Empower Artists

In the creative economy, decentralized ledger technology is poised to transform the existing paradigm and redefine the relationship between the artist and the end consumer, serving as a vehicle to disintermediate the middlemen, secure intellectual property and allow creativity to flourish.

Indeed, there are three key features of blockchains that are poised to help the technology transform entertainment as we know it:

Key Feature #1: Decentralization

Today’s internet is built on “centralized” aggregation and distribution, with the gatekeepers at FAANGS controlling over 70% of web traffic.

While these institutions do serve a purpose by supporting critical components such as web hosting, cloud computing, DNS services, social media, search engines and messaging services, they also levy heavy taxes on those seeking to do business on their networks and, as a result, greatly reduce the share available to content creators.

Figure 2: An iTunes Download Yields 9% of a CD and a Spotify Play Yields Less than 0.01%

Source: Information is Beautiful

This not only effects the artists, but can transfer to the entire ecosystem, including the salary, pension and benefits of the hundreds of workers that support the creative complex.

One solution to this problem is the creation of peer-to-peer ecosystems, but historical attempts to this end — such as Napster, BitTorrent and Pirate Bay — ultimately failed because participants had no real motivation to maintain the network. In fact, some studies estimate that fewer than 30% of users acted as “seeders” in any capacity.

Blockchain technology, however, uses game theory and cryptoeconomic incentives to eliminate the “leecher” problem and, as such, is spawning a new generation of crypto-based distribution networks such as Theta, Streamspace, Tron, Lino and Audius who are all vying to become the “decentralized YouTube” (or Netflix, Spotify, Google Play, etc…).

The creation of such a service would likely drive a tectonic wedge through the value chain, as disintermediating FAANGS would drastically reduce the cost of content delivery, massively increase the share available to artists and perhaps even serve as a long-term catalyst for cultural growth.

Key Feature #2: Immutability

Since the creation of Napster in the late 90s, intellectual property protection has failed to keep pace with digital distribution. Users paid over 300 billion visits to piracy sites in 2017, costing the global entertainment industry in excess of $125 billion in revenue per year and nearly 750,000 jobs. This problem is often worse in developing economies (e.g. Bollywood, Nollywood) and some estimate that over 90% of content is pirated in these markets.

Figure 3: Piracy Can Cost an Artist Almost 50% of Their Potential Revenue

Source: Digital TV Research

Piracy impacts the creative economy in many of the same ways as the reduction of share detailed above. For every Taylor Swift, there’s dozens of artists struggling to survive. These entertainers need capital to subsist and support their art, and a system that repeatedly infringes on their creative property undermines these efforts.

Unfortunately, this problem has been difficult to solve. Firms seeking to enforce intellectual property rights have faced limited options, mostly composed of (largely empty) legal threats and imperfect DRM technologies that are often ephemeral and easily-eluded.

Blockchains, however, possess the inherent property of immutability, a notion that has the potential to catalyze a radical concept borrowed from the art world — the provenance of digital assets. In other words, decentralized ledgers can allow artists to see the chronology of the ownership, custody and location of any given piece of content.

While many are scrambling for first-mover advantage — Sony filed a patent in April to store users’ digital rights data on a blockchain — one very promising solution is Po.et, who is creating “an open, universal, and immutable ledger for managing the ownership and licensing of the world’s creative works” — in other words, a global digital rights database.

In a nutshell, Po.et will: 1) allow artists to register their assets on a blockchain, 2) provide a unique “fingerprint” to each piece of content that can’t be altered, tampered with or edited and 3) help monitor the asset through all stages of distribution, redistribution and consumption (determining who owns it, who can access it and who is authorized to share it).

If Po.et, or a similar solution, is successful, it may usher in a new era for intellectual property protection — one that not only protects the original creator, but also makes it much easier for those who wish to legally consume, license or redistribute creative works (a substantial number indeed, as Muso found that 83% of all music, film and TV piracy is motivated by a lack of paid options).

Key Feature #3: Democracy

The sheer magnitude of FAANGS’s dominance in entertainment is undeniable. In publishing, music and video these companies hold upwards of 60% market share — well above the standard Herfindahl — Hirschman Index benchmark for an oligopoly.

Figure 4: FAANGS Claim Over 60% Market Share in Publishing, Music and Video

Source: Newsweek, Digital Music News, Mashable

Unfortunately, the cost of this centralization extends well beyond declining revenue and threatens the very nature of a free web envisioned by pioneers such as Tim Berners-Lee.

While there have been many who claim outright censorship by FAANGS, let’s use Hanlon’s Razor and assume that they’re not acting out of malice. Even then, the very centralized nature of these entities can result in a form of de facto censorship for many independent content creators who often face:

Coupled with the financial pressures detailed above, these forms can have a devastating effect on creative culture. Repressing independent artists can trigger a retreat from riskier content, pressure to accept investments with creative restrictions and reduced ability to finance essential staff and equipment.

While censorship — intentional or not — will always represents a serious threat to society, this problem can only become worse as our lives become more digitized. In particular, the rise of mixed reality and artificial intelligence creates the prospect for a dystopian future as envisioned by Fred Ehrsam in his article “VR is a Killer App for Blockchains”.

“Imagine if everyone lived in World of Warcraft or the virtual world that Facebook is building. People’s social lives, assets, and jobs will be tied up in this world. And that means that the central company running the world could take it all away on a caprice should it suit them.”

Indeed, decentralization will become paramount as we enter the next phase of Web 3.0, and companies such as High Fidelity and Decentraland are laying the framework for virtual worlds that allow users to retain their freedom.

In addition to portable identities, asset registration and virtual currencies — benefits which will underpin the fabric of virtual worlds — the success of these platforms will directly assist content creators by offering:

  • Democratic Distribution: Artists will be completely free to create whatever they want and make it available to consumers instantly — no need to need to pitch a studio, woo a record company executive or get the backing of a gaming publisher. Furthermore, companies such as Facebook, Google, Amazon and Apple won’t be able to prohibit the cross-platform migration of content.
  • New Monetization Models: Content creators will no longer be forced to rely on third-party advertising to succeed. Blockchains allow artists a variety of options such as micropayment subscription services, “micrometering” for snippets of their content, dynamic pricing and, in general, the ability to set prices themselves without having to go through a complex web of intermediaries.
  • Self-Determination: These decentralized platforms all have one thing in common — users own the platform and they decide on the rules. As such, creators are free to conduct business without the fear that they will be shut down by an arbitrary rule change from a centralized overlord.

A Decentralized Creative Economy Could Realize the Promised Potential of the Internet

When the internet began to achieve mass penetration in the late 20th century, idealists such a John Perry Barlow envisioned a flourishing of culture driven by techno-utopianism.

He believed that “we are creating a world that all may enter without privilege or prejudice accorded by race, economic power, military force, or station of birth…a world where anyone, anywhere may express his or her beliefs, no matter how singular, without fear of being coerced into silence or conformity…”

Unfortunately, the immense power of network effects undermined this promise, giving rise to a cabal of economic powerhouses that often impoverish artists, control distribution and stifle creativity.

While disintermediating these incumbents could have untold benefits to the humanities — giving rise to a beau ideal combining the universal access of the internet with the individual autonomy afforded by blockchains — many struggle to envision a world without Facebook, Apple, Amazon, Netflix, Google or Spotify. In fact, when discussing this idea, I often find myself in the following conversation:

Me: Blockchains could disintermediate FAANGS.

Them: But those companies provide value, what about hosting, distribution, support, etc.?

Me: Fair enough, but is that worth the value they’re capturing? If you were running a small business, would you pay the bulk of your profits to the company that warehouses and ships your products?

Them: Okay, but there’s so much content out there, who will tell us what to watch?

Me: Why do you trust Google to tell you what to watch? Wouldn’t you find a simple system based on peer recommendations just as helpful? And as deep learning progresses, couldn’t we easily create a platform that does a much better job at this than YouTube?

Them: Fair enough. But I still feel that you need someone you trust to oversee the whole process — an institution to govern, enforce the rules and protect the group from malicious actors.

Me: Why can’t groups police themselves?

Them: Well, they’ve never been able to do that in the past.

Me: But why?

This final question often creates a mild epistemological crisis. After all, the visceral need for centralization has been hard-wired into our shared culture. Throughout the history of mankind, all of our important institutions — governments, banks, churches, charities, schools, etc… — have been structured around consolidated hierarchies.

Entertainment is no exception to this rule — from the publishing empire of William Randolph Hearst to the oligopic markets inhabited by firms such as Universal Music Group, The Walt Disney Company and Electronic Arts to the internet monopolies of the 21st century, the past century has seen progressively fewer organizations intensifying their control over of mass media.

Figure 5: The Number of Firms Holding a Tangible Stake in American Media has Decreased 80% Since the 1980s

Source: Gizmondo

But I purport that’s not because systems designed around centralized authorities are necessarily the best solution, but because they have historically been the only solution. In other words, due to what computer scientists call the “Byzantine General’s” problem — which basically states that large and distributed groups need a trusted intermediary to govern themselves and enforce rules — networks tend to evolve into hierarchies, giving rise to kings, CEOs, presidents and popes.

But with the creation of the genesis block in 2009, Satoshi Nakamoto not only solved the General’s problem, but he (she or they) created a system with the potential to upheave political, social and economic systems that have existed since the Late Neolithic civilizations of the Fertile Crescent.

In other words, blockchains create the potential — for the first time in history — to organize large networks of people without the need for a centralized hierarchy.

And if that promise does materialize, then disrupting companies such as FAANGS may fulfill Mr. Barlow’s promise and engender a new cultural renaissance.

Background in finance, strategy and ops; VC partner, tech COO/CFO and#cryptoenthusiast. Ex - Stanford, West Point, Disney, Merrill Lynch, Oaktree