Decentralization has never been an end-state. In hindsight, it has always been a vessel for achieving a concession from a centralized body it is protesting.
Every decentralization play has followed a simple pattern: protest a market inefficiency, win that protest via a major concession, and then disappear back to fringes of society.
You can see this throughout history.
If you want to legitimately pay for downloadable music you need to access dozens of Web sites using a variety of different programs that may or may not be compatible with your hardware. And there’s a good chance that what you want isn’t even available.
On the other hand, if you pay nothing you can find whatever you want in a heartbeat... This isn’t the world I want to leave to my grandchildren, but if the many players of the recording industry don’t get their act together, it’s what they’ll get.
— BILL BARNES, Slate Magazine, 2002
- THE PROBLEM (1999–2002)
• Major record labels did not make popular music available online
• When they did, it spanned across multiple different sites and formats
- THE PROTESTS
• Napster, an application with a library of all music in mp3 format
• Gnutella protocol (behind LimeWire), and derivations
- THE CONCESSIONS
• Record labels agreeing to 99¢ music on the iTunes Music Store
• Freemium licensing model behind Spotify
Online music had a tumultuous road to what I call its “steady-state” product-market fit: a paid subscription to stream any song you want from a single service.
The mp3 file was a revolution, and it was how the world wanted to access music in the late 1990s through the early 2000s. It was lightweight, supported by multiple clients, and easy to copy across devices. Record labels had not gotten their acts together to find a reasonable, user-friendly way to provide customers music by top artists online. This market inefficiency bore the protest called Napster in 1999.
By 1999, Napster had 150,000 registered users trading 3.5 million files. By 2000, an even more resilient decentralized protocol called Gnutella was born, giving birth to popular peer-to-peer applications like LimeWire. By 2001, Bram Cohen invented BitTorrent, an even more decentralized way to download files — and Napster had 60 million registered users.
The “centralized” world tried to respond to this sudden uptick by having a legal alternative. In 2000, mp3.com released my.mp3.com, a service that would let you legally stream songs after you could prove possession of a CD containing that song by inserting it into your computer.
Even this was unacceptable. Universal Music Group, EMI, Warner Brothers, BMG and Sony, banded together under the RIAA and successfully sued mp3.com in 2000 for what the court deemed was not “fair use” of the copyrighted materials. mp3.com settled for $54 million, which led to their share price plummeting, and eventually the discontinuation of their service.
But Napster was worse than mp3.com for the record labels. It was built on a peer-to-peer network, meaning these mp3 files lived on computers from regular people across the world. This made it easy for record labels to come after the company of Napster for helping people find these songs, but difficult (and soon, impossible) to actually cut off access to the millions of computers actively sharing these songs on the underlying network. In laying the groundwork for a resilient, decentralized protocol, Napster taught the world how to protest market inefficiencies from central companies.
As of 2001, no concession had been made by the record labels to the protests known as Napster, LimeWire (and its many derivatives), and soon BitTorrent. The Business Software Alliance estimated that the worldwide software piracy rate was forty percent, costing the music industry $10.97 billion in lost revenues.
Noticing that these protests were growing, the record labels sought to get their act together — the first step on their way to conceding.
Attempt #1: pressplay
In December of 2001, Universal and Sony Music partnered to came up with pressplay.
‘’We are now spending tens of millions of dollars to help launch pressplay in the hope that a legitimate response to the illegitimate services will provide an attractive alternative to consumers.”
“This is truly a time for artists and record companies to be working together.’’
— Rand Hoffman, Head of Business Affairs for multiple record labels
Why it was rejected: Among pressplay’s tone-deaf problems were:
- Not every song was available for streaming, and among those that were, not all could be downloaded
- You couldn’t burn more than two tracks from the same artist
Because of serious issues with how they compensated artists, pressplay did not have access to the breadth of artists that decentralized applications did. One manager computed that an artist would need four of their songs downloaded for that artist to earn one penny!
Attempt #2: MusicNet
Why it was rejected: MusicNet cost $10 per month for 100 streamed songs and 100 downloads. Each downloaded audio file expired after only 30 days. Each time you listened to a song, it counted against your stream total. This was a far cry from the flexibility LimeWire and BitTorrent provided.
Both companies had only a segment of popular artists with completely incompatible ways to listen to that music. To compete with the decentralized options, the music executives would need to do more.
Neither [pressplay nor MusicNet]’s paltry music selections could compete against the virtual feast available through illicit means.
— PCWorld.com, 2006
The Concessions Trickle In
I came up with 99 cents per track download. [Steve Jobs] liked it; a lot of others didn’t like it. But at that time, there was nothing going on except free downloads.
— Paul Vidich, VP of Warner Music Group
In 2003, Apple launched the iTunes music store. Key to its value proposition was that it included the distribution rights for the most popular copyrighted songs on the market in one single location.
The record labels came to the negotiating table with Jobs because their half-baked concessions had not worked. What ensued were famously intense negotiations leading to concessions the record industry had never-before made, namely around pricing and digital rights management.
We believe that 80% of the people stealing stuff don’t want to be, there’s just no legal alternative. So we said, ‘Let’s create a legal alternative to this.’
— Steve Jobs, 2003
You did not “rent-to-own” the music you purchased for 99¢. You owned it, and the iTunes store interface — and its ease-of-integration with products like the iPod — made it friendlier than any decentralized application. To this effect, the iTunes Music Store sold over 1 million songs in its first week, and had over 70 million purchases its first year.
The iTunes concession by record labels was a resounding success, as money starting flowing into the iTunes ecosystem. As the years went on, users became less interested in owning an mp3 than being able to stream any song on-demand; specifically, in a freemium model.
The Spotify Concession
Spotify’s co-founder Daniel Ek used the exact same language to describe Spotify’s value proposition that Steve Jobs did when announcing iTunes. Just as Jobs several years earlier, Ek lamented that legal options did not provide a “better experience than piracy”!
Though Spotify launched in Europe in 2008, it took until 2011 for the service to become available in the US. Digital music services like Spotify needed to negotiate rights with each record label and copyright holder, unlike radio, which could pay one up-front fee.
Though the record labels in the U.S. made licensing deals with similar offerings Rhapsody and MySpace music, they were reluctant to make any such deal with Spotify due to its freemium model. Spotify was the only proposed music streaming service where users did not have to pay up-front. Advertising would drive revenues from free users, a model that record labels resisted.
“Free streaming services are clearly not net positive for the industry, and as far as Warner Music is concerned, it will not be licensed.
[The freemium model] strategy is not the kind of approach to business that we will be supporting in the future.”
— Edgar Bronfman, Warner Music CEO, 2010
The negotiations between Spotify and record labels once again came down to the pressure of the protests, and how to end them.
Convincing them about their freemium model, which gave record labels less control than ever, was the only way to do so.
Effects of the Spoify concession
Once the record labels conceded to the protests by accepting Spotify’s freemium model, the protests once again got pushed to the fringes of society. This is largely because decentralized protocols have a worse user experience than centralized alternatives. Rather than communicating with a single computer, you have to interact with several around the world, some of which may not have the information you need.
Forty percent of respondents to the NPD survey who decreased their illegal file-sharing said they did so because of access to legal streaming services like Pandora and Spotify, which are easier to use and don’t present the threat of spyware or viruses
— Victor Luckerson, TIME, 2013
The music industry lost a lot of money when it dithered over this transition [to user-friendly content], and now the movie business seems to be making the same mistake. It could be raking in a lot of cash… until it works out a plan to do so, there’s always BitTorrent.
— Farhad Manjoo, SLATE, 2009
- THE PROBLEM (2000–2011)
• Popular movies had an 11-year lifespan before becoming available for digital, subscription-based streaming
- THE PROTEST
• BitTorrent for downloading movies
- THE CONCESSIONS
• Starz licensing deal with Netflix for premiere content in 2008
• Floodgates opening to more premium channels agreeing to licensing with Netflix, future competitors
The same protest → concession → protest ends pattern emerged in the movie industry. The concession was Netflix’s stream-all-you-want subscription model that studios resisted.
To understand the concession, it’s helpful to understand the lifecycle of rights around Hollywood movies. In this “windowing system”, a movie starts in theaters, hits DVD after a few months, becomes available for pay-per-view, goes to premium channels with a roughly 15 month exclusive rights period, then goes to ad-driven broadcasters and networks like FOX and NBC. Finally, after 11 years, the movie enters a “library” phase in which places like Netflix can stream it.
This brutal lifecycle made Netflix, at best, a collection bin for outdated movies. To break this mold, Netflix sought to inject itself into an earlier phase of the lifecycle: rather than wait 11 years, Netflix would negotiate deals with the premium channels to receive the licensing rights at the same time as cable networks did.
To this effect, Netflix struck a deal with Starz Entertainment in 2008 to legally stream premiere titles like “Spider-Man 3” and “Superbad”. This deal cost Netflix only $25 million a year until 2012 when it would expire, and swelled Netflix’s user numbers from 9 million to 25 during that timeframe. Starz found it cannibalized their own sales; in fact, analysts estimated Starz should have priced the deal at $300 million.
Though ill-advised for Starz, these premium titles’ availability on Netflix was very much the “concession” the rampant BitTorrent protest for movies sought: a subscription model for unbounded streaming of premium content. As evidence, in May of 2011 (when the Starz agreement was in place), Netflix overtook BitTorrent in aggregate broadband traffic from North America.
More bodies of research show that when premium content was available on Netflix, there was a subsequent drop in BitTorrent downloads for that title. Their exploding user numbers made premium channels reluctantly came to the table to offer similar licensing deals. Lionsgate agreed to license its Mad Men series to Netflix in 2011, and CBS its Frasier, Medium and Cheers shows as well.
The only fights now are over money… as firms like Netflix get more subscribers and studios get more desperate as traditional revenue channels dry up, we’ll see more deals to get better titles online.
— Farhad Manjoo, SLATE, 2011
What does this mean for cryptocurrencies?
Cryptocurrencies are a decentralization play like any other. They are a protest seeking a concession.
The killer concessions that might end much of the cryptocurrency protests include:
- Borderless transacting without intermediaries
- Ease of access to banking and capital (creating a private/public keypair rather than being beholden to a bank)
- Legal, digitized gambling
They would never include:
- Censorship resistance
- Anonymity in transactions
These last two points are historically what mainstream users care least about. Not only that, but they are the culprit for why decentralized protocols uniformly have such a bad user experience. Conceding to the mainstream demands behind the protest, while eliminating the friction, are exactly why Spotify and Netflix beat out BitTorrent. For mainstream users, it’s a win-win.
What are the “killer concessions” for cryptocurrencies?
The profile of the “killer concession” I outline above, which concedes to the biggest drivers of the protests, are likely:
- A trusted “globalcoin” like Libra, where nations cooperate to regulate a currency spanning borders.
- Nations digitizing their sovereign currencies on an interoperable (or single) blockchain, so people can easily transact with each currency.
A programmable “globalcoin”, or nations digitizing their sovereign currencies, would allow transacting with no intermediaries, ease of access to banking, and programmable money and smart contracts for applications like gambling. These chains would be more centralized, and thus not censorship-resistant, but consequently would also provide a better user experience.
If you want evidence of this “concession” model applying to cryptocurrencies, consider that China’s President recently announced they will emphasize adoption of blockchain technology for China, stating it is “necessary to implement the rule of law”, and also calling for “guidance and regulation.” If China’s proposal does not satisfy these global protests — say, capital controls are even stricter on their proposed “blockchain” than the status quo — it will be another MusicNet, and the protests will keep growing. However, in response to growing protests, every country will be forced to iterate on concessions until they finally arrive at a satisfactory response like iTunes or Spotify.
Isn’t decentralization the point of cryptocurrencies?
Many would argue that the entire point of cryptocurrencies is decentralization: trustless assets with fixed supply caps. To them, centralized concessions could never quell the protests, because decentralization is the value proposition. Governments can arbitrarily print money, but cryptocurrencies cannot change their supply schedule unless the majority of their network agrees to do so.
However, concessions could still adversely impact this seemingly “untouchable” property. First, the “globalcoin” concession would also support smart contracts, allowing every application that drives value to Ethereum — digital collectibles, lotteries, prediction markets, etc. — to also be built there. While these assets will be on a more “trusted” chain, it will also be free of the user experience issues plaguing blockchains today. Cryptocurrencies that arouse interest from the promise of smart contracts will be reduced to their core value proposition: as a trustless store of value. When that happens, developers, companies, miners, and users who may have sought more from these blockchains may leave in favor of centralized alternatives.
Second, the very need for an iron-clad safe haven asset may decrease with the advent of a globalcoin, or if several countries digitize their native currencies. Venezuelans suffering from hyperinflation today may seem like the perfect use case for a safe haven asset. In reality, their problem is one of liquidity: they seek to store value in something more stable than the bolívar. Capital controls currently make that impossible.
I keep all of my money in Bitcoin. Keeping it in bolívars would be financial suicide...
I don’t have a bank account abroad, and with Venezuela’s currency controls, there’s no easy way for me to use a conventional foreign currency like American dollars.
— Carlos Hernandez, Venezuelan Economist, “Bitcoin Saved My Family” (NYT)
In short, concessions could make the markets for currencies perfect: if the bolívar suffers, transactions may proceed in the digitized yuan, dollar, euro, globalcoin, or anything else. Liquid markets may lessen the need for failsafes.
There will likely still be demand for a trustless, safe haven asset in this more liquid world. However, the “killer concessions” will still reverberate throughout the cryptocurrency industry as it exists today. At the very least, these concessions will eliminate all usage of projects where being completely trustless is not the primary demand driver. Everything else can, and will, be done better on a more trusting “globalcoin”, the same way Spotify is used over BitTorrent for music.
This is not a doom-and-gloom scenario. When the “killer concessions” are inevitably made, we will be living in a world that by definition has less of a need for protest. All protests seek concessions, so even if some market caps decrease, cryptocurrencies will have spurred meaningful change the same way Napster, LimeWire, and BitTorrent brought us iTunes and Spotify.
The concession for a globalcoin like Libra, or digitized national currencies, will not take place overnight. In fact, Libra will likely never see the light of day. Cryptocurrencies are so young that we are in the pressplay and MusicNet days of “concessions,” and what Facebook is doing today is the equivalent of proposing Spotify to music executives in the year 2000!
In a sense, the price of the token represents the health of the protest. When the protest ends, you would expect to see that health metric drop as well. This could be why the BitTorrent token is doing so poorly: it was created after the Spotify and Netflix concessions. Had this token been added pre-concession, we may have seen a different outcome. Bitcoin and ether have a token to capture the momentum of their protest while it is alive and well. Time will tell if mainstream concessions have a similar effect.
Napster caught the mainstream eye in 2000, and it took about 11 years for the Spotify concession to be made. Concessions around currencies require nations to cooperate, which is inherently more difficult than music and movie executives. If we assume a similar time schedule, we can expect the concessions I outlined above in the late 2020s. When that takes place, we will likely see the protests (use of decentralization for money) die down.
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A response I might hear:
> “But money is different than music and movies. Money moves in two directions, whereas the incentive with files is just to download.”
Currency dynamics existed in BitTorrent well before any token was added. These dynamics incentivized transacting in both directions (receiving and sharing), just like cryptocurrencies today. As you would expect, these “currencies” fell out of favor once the right concessions were made.