Spotify announced yesterday that it has acquired the blockchain startup Mediachain Labs for an undisclosed sum. For those watching the music/blockchain space, this is big news indeed.

Here’s a passage from the whitepaper I recently published on blockchain technology for music:

DSPs [digital music service providers] have become the “big boys” of the music industry, as their aggregate revenues (from users and advertisers) now exceed that of record labels and music publishers combined.

DSPs currently face two problems in music royalty transaction processing that blockchain technology can help solve. One is the inefficiency of processing many different types of music transactions from a very large number of rights holders. DSPs currently get information from rights holders in many different formats, which all have to be processed and converted. The use of blockchain technology, while not a solution in itself, helps motivate the use of standards that promote consistency and efficiency.

The other problem is incomplete or erroneous data that occurs when so many different entities and data sources are involved. DSPs are motivated to reduce not only operating costs but also the legal risks associated with potential improper royalty payments. Blockchain technology can’t solve the “garbage in, garbage out” problem, but it can help by eliminating the redundancies that arise from copying data from one place to another and making it easier to trace errors and gaps to single sources.

In addition, DSPs have more recent IT infrastructure that is more likely to be easier to integrate with blockchain-based solutions and standards than those of traditional PROs or labels. Therefore the largest early adopters of blockchain-related technology for music are likely to be DSPs.

I’ll go further and say that real blockchain-based solutions to these music royalty-processing problems will only succeed if the major DSPs lead the way. Yesterday’s announcement represents a huge step in that direction.

NYC-based Mediachain is one of a handful of startups working on media industry applications for blockchain technology to track transactions, content rights ownership, and attribution. Mediachain’s technology had been oriented towards digital images and artworks rather than music; see for example the Mediachain Attribution Engine. Yet Mediachain has been involved in the Open Music Initiative (OMI), and co-founder/COO Jesse Walden had previously worked in music artist management, broadcast streaming, and concert promotions.

Spotify’s brief announcement indicates that it sees the relevance of its new acquisition, that it should “help further Spotify’s journey towards a more fair, transparent and rewarding music industry for creators and rights owners.”

Spotify has made many acquisitions over the years, but few have the potential to impact the digital music ecosystem as much as this one. In fact, I’d say this deal is the most significant since Spotify’s acquisition of The Echo Nest three years ago. The Echo Nest developed a highly sophisticated big-data analytics platform for music discovery, recommendations, personal playlist generation, and so on. The Echo Nest had powered the recommendation engines and custom radio features of many music services: Rhapsody, MOG, Rdio, iHeartRadio, Vevo, and others. Once Spotify acquired the company, it had to end its relationships with many of those competitors. Yet at the same time, Spotify made Echo Nest data available to other app developers via APIs, which has engendered or enhanced many music apps.

Although Mediachain hadn’t made any deals with music DSPs, Spotify will presumably provide royalty transaction data on blockchains for rights holders such as record labels, digital distributors, publishers, and so on. Spotify’s acquisition of the music recognition technology company Sonalytic earlier this year should also help by enabling it to improve mapping of sound recordings to their underlying compositions — a problem that (as I explain in the whitepaper) has plagued DSPs for years. Taken together, these capabilities should enable Spotify to reduce its transaction costs and increase efficiency by relying on open, distributed transaction processing, while also reducing issues of incomplete or incorrect data that have led to problems for it in the past.

Yet if each major DSP acquires or builds its own blockchain technology, rights holders will have to interface with multiple blockchains — each with its own data model — to process DSP transactions. That doesn’t help anyone. Meanwhile, other entities are currently jockeying for positions in setting standards for music transaction blockchains, including dotBlockchain Music and the OMI; the latter is creating standards for data interoperability that could apply in a multi-blockchain world.

It would make life easier for the entire digital music ecosystem if Spotify were to gain experience with its new blockchain technology, implement it for rights and royalty transaction processing, and then license it to other DSPs on reasonable terms. But given Spotify’s track record with The Echo Nest, this seems like a long shot.

I’ll add that I think this acquisition is more important, at least in the near term, than the announcement earlier this month of IBM partnering with ASCAP, PRS, and SACEM to “explore the potential of blockchain technology” by prototyping a system for managing links between ISWCs (the standard identifiers for compositions) and ISRCs (the standard identifiers for sound recordings). ASCAP, PRS, and SACEM (of the US, UK, and France respectively) are among the largest performing rights collecting societies in the world.

Again, this is a problem that badly needs to be solved. But the purviews of the PROs involved in this initiative are limited: they only handle performance rights on musical compositions; they don’t handle the mechanical rights that are actually the sources of many of DSPs’ problems with royalty payments, let alone rights on sound recordings. And a growing number of DSPs are eschewing blanket licenses from PROs in favor of direct licensing deals with major publishers. DSPs are the sources of the billions of transactions per year that need to be accounted for, so they drive demand for solutions to rights management problems, and they are in the best position to actually get the solutions to market most efficiently.