Fraud, the Eternal Frontier

Let’s set the record straight – fraud is an ever evolving threat to every market in the modern world.

And the music industry is no exception.

Streaming, the dominant form of music consumption, contributes approximately 83% of the industry's revenue as of now. However, it is plagued by fraud, with estimates suggesting over $2 billion lost annually. 

Criminal enterprises and bad actors’ coordinated attention have resulted in the destabilization of the economic principles of music.

And all artists and stakeholders feel its impact. 

Over the past two years, I've openly addressed this issue, gaining insights from both internal and external perspectives, working across various DSP/streaming platforms to lead strategic efforts in resolving the problem. This involved architecting new streaming models and collaborating with anti-fraud coalitions and services like Beatdapp to bring attention and actionable technical capabilities to address this growing issue.

As both an economist and musician, I find this issue troubling, requiring organized attention and action. 

Let's delve into the problem, assess where we stand, and discuss the necessary next-step solution.

The Problem

I’ve said it before and I’ll say it again – undetected or unaddressed fraudulent activities pose a significant threat, potentially leading the music industry to invest in and bank on inauthenticity, impacting how we measure the success of music culturally.

Gambling 83% of an entire industry's income, which continues to grow globally, on broken systems susceptible to fraud is not a risk we can afford to take.

More importantly — the continued innovation in music tech should not be measured solely by its potential impact on already broken systems.

To understand how to combat fraud, let’s look at how other industries manage and combat these inevitable challenges. 

The Example

In the financial sector the Financial Services Information Sharing and Analysis Center (FS-ISAC) was created in 1999 as a platform for sharing information and best practices to combat cyber threats and financial fraud.

In the healthcare industry the National Health Care Anti-Fraud Association (NHCAA) is a prominent organization that works to combat healthcare fraud in the United States.

In advertising the digital advertising industry has been battling ad fraud, including click fraud and impression fraud. Companies have formed initiatives like the Interactive Advertising Bureau's (IAB) Anti-Fraud Working Group to develop standards and best practices for fraud prevention.

These organizations have been crucial in addressing the ever-evolving nature of fraud in the modern world in their respective industries.

By sharing information, best practices, and continually scaling crucial technologies, these organizations aim to stay ahead of fraudsters and minimize the impact of fraudulent activities on their respective sectors.

But before addressing their technical capabilities – how did these organizations come to fruition?

In almost all cases efforts began as industry coalitions. 

The realization that collective action is more effective than individual efforts is a crucial starting point. I believe this is where we are today.

Coalitions are a good thing. 

They are a sign of collective agreement by acknowledging there is a greater problem. 

However, they are not the solution. 

Forming these organizations can be complex, with challenges related to conflicting incentives among participants.  

Before proposing a solution, let’s revisit the music industry’s problem.

The Music Problem Revisited

Streaming fraud is a significant threat to the cultural climate of emerging music, artists' livelihoods, and the industry's innovation. At the core of this issue is an outdated industry streaming model called pro-rata (full explanation here).

The pro-rata streaming model has become a potential 'goldmine' for criminal activities, allowing manipulation for monetary gain.

By industry estimates, a $10 premium account can generate up to $352 in revenue per month from streaming fraud.

The shortcomings of this model have attracted criminal enterprises, leading to issues like money laundering or simply bad actors pursuing monetary gain. 

Consensus 

The industry consensus is that the status-quo pro-rata streaming model must go, as it plays a foundational role in facilitating fraud. 

Large players in the market have finally started to make moves to penalize bad actors and potential enablers. 

Others have moved to overhaul and innovate the streaming model space in order to shift incentives and the means to defraud a system.

With such change, this eventual differentiation of how various platforms pay artists is a good thing (more here). 

However the title of this piece needs to be repeated – “fraud, the eternal frontier”.

Even with new models, the incentives and means of fraud shift.

As new streaming models inherently curb fraud, new and varied incentive structures are introduced. 

Sophisticated fraud will attempt to evolve alongside these new incentives and diminish their commercial potential. Bad actors are effective shapeshifters who respond to the incentives created by new models.

So what is the solution?

The Necessary Next-Step Solution

Considering the complexity of the above – let’s address the bigger need.  

We need a well-resourced, information, and data-sharing collective hub similar to those established in other industries decades ago. This hub must be built from active relationships within the music industry and function as an 'outside entity' to its members.

A collective hub would be key in prevention while clearing innovation's commercial runway.

From my experience across services and solutions, Beatdapp stands out as the well-positioned solution, trusted by major organizations, working with over 30 trillion data points across various partnerships, and continually improving capabilities to tackle complex fraud models. Also from personal experience in piloting referral cases, Beatdapp exemplified having a direct channel to law enforcement coordination. 

Most importantly of all, Beatdapp has no thumb on the scale. 

As a trusted third-party source of truth, a Beatdapp-backed global consortium would amplify the industry’s intelligence, knowledge, and shared practices – ultimately balancing competition with collaboration while ensuring commercial insurance for all. 

I am hard pressed to see if there is another more vital bigger-picture next-step needed in this space. 

Acknowledging the problem was the first step; now, let's build the ability to act unilaterally across industry stakeholders, working towards a common goal of combating fraud. 

The innovation and success of the music industry depend on it.