With more than 3 billion people across the world living without Internet connections in an age when most people cannot
Andrew Batey and Morgan Hayduk started out as MBA college friends, but are now the co-CEOs and co-founders of Beatdapp, a blockchain-based platform for records labels to track streaming plays.
When the idea behind Beatdapp was conceived, the two were at a football game in Los Angeles with a group of friends and contacts from the entertainment industry. The year was 2016. The team was the LA Rams. Batey was Managing Partner at a tech company in the music industry, and already a cryptocurrency enthusiast and buyer. Hayduk was working in the entertainment space as a lobbyist for greater copyright protections for musicians.
At the game, a representative from one of the largest record companies approached the duo with a unique problem: labels have no way to track the amount of royalties they are owed by streaming services in real-time.
At present, streaming services usually self-report play counts to labels, disclose the amount they earned from advertising revenue and subscription fees, and labels invoice streaming services for a percentage of the earnings reported by streaming services based on play count.
Concerns about usage, measurement, and immutability within this system were worrying record labels; they needed a secure way in which to audit their partner streaming services. Blockchain, which is decentralized, peer-to-peer, and cannot be changed easily, seemed purpose-built to solve this issue.
“We knew we had a problem that wasn’t widely publicly discussed yet. Everybody in music was, externally at least, focused on who owns what part of a song, but not necessarily thinking about the big picture – is the amount of money even accurate?” says Batey.
They co-founded Beatdapp in January 2018 in Vancouver, along with Pouria Assadipour, who spearheaded the product development while the startup was in stealth mode for 15 months, and is now the CTO of the company.
“No one had ever built the tech before – a blockchain capable of processing a million streams per second. Most blockchains do a couple of hundred transactions, maybe 40,000 – 50,000 transactions per second,” says Batey.
He adds that Assadipour was “banging his head against the wall for a year” in his attempts to build the technology. Nevertheless, the team persevered.
Only after they were able to deliver the throughput required and prove their concept did the Beatdapp team reach out to the labels and start signing them, and build the business’s revenue pipeline.
Once the startup emerged from stealth mode, it quickly attracted media attention, particularly after graduating from the 500 Startups seed accelerator program. Last year, the company also participated in two other accelerators – Creative Destruction Lab and Project Music – and raised US$3.2 million last October.
“It was kind of a perfect storm of circumstances that led to that, and then just a lot of hard work,” says Batey.
A multi-billion-dollar problem
Batey and Hayduk approached several labels to find out if the problem was widespread. All labels confirmed that it was a huge issue for them.
“It was kept under wraps because without a solution, the last thing you want to do is tell everyone that the boat’s on fire,” Batey explains.
According to Batey, music labels usually conduct audits every three years, and in the 50 audits that they heard about or saw the results of, not a single case had an accurate play count track.
“The best-case scenario was 8% under-reported, in the worst case it was 31%, with the average being 15% under-reported,” he says.
According to a report by the Recording Industry Association of America (RIAA), in 2019, total revenue from recorded music in the U.S. grew 13% year-on-year, from $9.8 billion to $11.1 billion. Moreover, total revenues from streaming music grew 19.9% to $8.8 billion in 2019, accounting for 79.5% of all recorded music revenues.
This is the fourth year in a row of double-digit growth, most of it through paid subscription services, which reached more than 60 million subscriptions in the U.S. in 2019. The same year, the streaming market alone was larger than the entire U.S. recorded music market in 2017.
The picture of multi-billion dollar losses in revenue for record labels from streaming services thus painted, the gravity of the problem became obvious, and the Beatdapp team dived deeper into how blockchain could solve it.
They dedicated a year to prototyping, testing, and stress testing their system, which can now handle 1 million transactions per second – around twice the previous industry standard, according to Batey.
Scalability is critically important for Beatdapp because even with this kind of capacity, the sheer volume of music being streamed globally is mind-boggling, and only continues to grow.
As an example, in 2019, the growing number of on-demand streams reached 1.15 trillion streams in the U.S alone. Even with Beatdapp’s ability to process 1 million transactions every second, tracking this volume would take Beatdapp a full 13 days.
How it works
Every time a user clicks on play for a song on any digital service provider (DSP) like Spotify, Apple Music, or Amazon Music, their phone requests the song from the DSP’s server and the content delivery network delivers it to their phone.
With Beatdapp, when a user’s device makes the request, another request is concurrently sent to the blockchain. Beatdapp does not interfere with the content delivery and does not cause any friction or delays.
On the blockchain, the DSPs or streaming services, the record labels, and Beatdapp each own nodes. There are play count conditions that determine what financially counts as a play, such as the requirement that a consumer has to listen for at least 30 seconds.
Each time a request comes in, all three nodes detect whether a consumer is a valid consumer, and whether a play has met all the play count conditions, and once a play’s validity is agreed upon by all three parties, they cryptographically sign a receipt.
Therefore, for every single unique play, there’s a receipt of the transaction with everyone’s cryptographic signature. The record of these receipts is immutable, because all three parties agree to the play as it occurs in real-time. If traditional reporting channels show a discrepancy in the play count, it is possible to verify and reconcile it immediately, says Batey.
Beatdapp’s solution also claims to resolve another major issue with the traditional auditing schedule: if labels invoice for discrepancies three years later during an audit, they may recover only cents on the dollar, whereas Beatdapp helps them recognize this revenue almost immediately.
Protecting privacy through a trustless platform
True to the anonymity offered by cryptocurrency and blockchain, Batey says that Beatdapp does not collect any Personally Identifying Information (PII), and consumers are merely represented by their public blockchain addresses.
“We have no idea who the user is, so we’ll never be a marketing platform that offers targeted ads or the ability to build custom audiences,” he says. “Users are completely anonymized, but they are validated.”
Similarly, DSPs validate users by giving them permission for having content delivered. But the users only appear as a long string of letters and numbers in a public address, with no demographic or other personal information.
Hayduk emphasizes the need to protect user privacy not only for the consumers, but also for the DSPs.
“If you’re on somebody else’s servers, you don’t want to be collecting information about their users – that would violate their terms and probably ours as well,” he explains. “We don’t want to get into a place where they’re worried that our endgame is data collection and marketing services.”
The Business Model
Beatdapp charges record labels an annual contract fee following a free 3-month trial period. The trial period is used to show labels how the technology works, estimate the amount of additional revenue it can generate for the labels, and negotiate multi-million dollar deals with them.
For example, if a label makes $100 million a year, Beatdapp claims that it can potentially generate $15-$20 million in additional revenue, and their contract fees are calculated as a percentage of that revenue.
The startup’s biggest customer is Entertainment One Music, one of the largest independent music labels, which represents icons like Snoop Dogg, Death Row Records, and the Arkells. Beatdapp has engaged close to 50 labels for pilots, and have several DSPs on board, with services about to go live.
Signing on more DSPs is a key target for Beatdapp in the near term. Income from DSPs often makes up 10% or more of the smaller labels’ revenues, so having more DSPs on board will also make it easier to sign on record labels. However, the server and processing cost of on-boarding a new streaming service is steep – the startup plans to fundraise again in order to prepare for this process.
Music streaming is set to grow
According to Goldman Sachs, music revenue is estimated to more than double to about $131 billion by 2030, while revenues from music streaming are expected to touch $38 billion by 2030.
The surge is being led by Millennials and Generation Z, who spend more of their annual budgets on music than any other age groups.
According to 2018 data, 18% of people in developed countries and 3% of people in emerging markets stream music on their phones.
With population growth, increases in smartphone penetration and Internet usage, and increasing access to streaming platforms, music streaming has huge potential for growth and monetization. This seems to point to markets like India and China as main growth centers for Beatdapp’s business, but Hayduk is careful to emphasize the limitations still present in the market.
In countries like India and China, he says, people are streaming music more than ever, but services have yet to find a way to monetize those users. He believes these emerging nascent markets still have another 3-5 years of development to go before they can be monetized. However, in the meantime, there is plenty of growth for Beatdapp to capture.
“When you talk about a $40 billion industry, people will care deeply about the fact that they’re getting their share correctly and [upfront], as opposed to after the fact,” says Hayduk.
He adds that the exponential growth seen in this space could one day make Beatdapp one of the most important stakeholders in the industry.
“I think if we had come along three or four years earlier, it would have been premature for a product like ours,” he says. “But now, we’re walking into a space where there really is an appetite for what we’ve built – and we have a head start.”
Header image by Spencer Imbrock on Unsplash