Blockchain Entertainment

While the global banking behemoths rush in to the blockchain space, many industry verticals beyond banking are also exploring applications for this technology.  This starts with insurance but also extends to supply chain management and shipping.

However, there is a new vertical that has almost overnight started using the technology, learning how to make money from it. Even if surreptitiously.

The entertainment industry is quickly embracing the blockchain – and on a couple of fronts.

Why is this happening?

Firstly, the film biz has always been high tech and since the early nineties only moving in one direction when it comes to digitalization. Those who thought film stock might actually stick around were quickly disabused of that notion even before Youtube.

However, beyond digitization, which is more an issue of bandwidth and computer-to-computer connections, the film industry and the music industry following close behind it, might have finally found a killer app to meet the demands of the digital age.

Streamed music and video takes a huge amount of hard disk space on digital networks and servers. Digital creative content is also notoriously prone to hacks and leaks.

If companies, or even artists themselves, learn how to market and sell their creative works using blockchain technology, this might provide a cryptographically secure answer to the issue of IP protection in a digital environment, which will be especially valuable for music and film distribution as well as gaming.

If this sounds futuristic, think again. There are already blockchains on the market which are specifically designed for content management and monetization.

What Kinds of Blockchain Work for Creative Content?

Expect many different experiments, but one of the earliest is STEEM. As of last year, it became the third largest digital currency as measured by market cap. The idea is that content creators can open an account and be rewarded for their work by other users. Once rewarded, creators can either get paid or they can reinvest in the system, thus gaining more authority and helping their work get found more easily.

Think Reddit that you have to invest in, but with a theoretical monetary incentive downstream.

While the approach got a lot of early positive and mainstream press, many observers remained sceptical. The reward system overwhelmingly favours those who have the most STEEM in their accounts, which means it is, from the start, an insider’s game. Steem dollars, the currency behind the blockchain, are also supposedly pegged to the worth of US dollars, although this has been challenged by the industry itself. Many have directly challenged the legitimacy of the crypto coin system behind it as a Ponzi scheme and it is easy to see why. Even the industry press remains sceptical.

But that is just one entry into this space, and an early one. And for all the negativity and dismissiveness, there clearly is a role for blockchain and cryptocurrency in the entertainment industry – just not necessarily a STEEM model.

The big boys are also moving into this world – even secretly at this point. The American TV network Showtime was just caught distributing code onto users’ machines that secretly mined a cryptocurrency called monero on subscribers’ computers. As of September the company was forced to remove the code. It is unclear how it got there and nobody is issuing any explanations.

And then there is Disney. The company known for its animations and child friendly entertainment, as well as its affinity for technology, began building an exploratory blockchain called Dragonchain several years ago. From October 2 to November 2 this year, Dragonchain Inc. is also holding an initial ICO to raise money for the company. Approximately 238 million tokens or “dragons” are now available to the public.

Disney is not directly involved. For now.

Netflix Move Over

The internet helped to destroy billions of dollars of revenue for creative industries and artists because it is so easy to post a digital file on a torrent site where it can quickly be downloaded, copied, and shared. There has been very little way – at least in the past – to control what happens after initial distribution.

Online entertainment providers like Netflix have moved into the space this has opened – where users pay a regular subscription fee.

With blockchain, however, the situation becomes very different. Smart contracts, made possible by blockchain based software platforms like Ethereum, could be used to ensure artists receive the royalties that are due to them.

Blockchain, for that reason, will continue to make major inroads into the entertainment space. This is just the beginning.

Marguerite Arnold is the founder of MedPayRx, a blockchain healthcare startup in Frankfurt. She is also an author, journalist and has just obtained her EMBA from the Frankfurt School of Finance and Management.

Image: Pexels

Bank Bailouts and other Moral Hazards

In the previous post on Moral Hazard, we learnt that Moral Hazard refers to any situation where a person is not fully responsible for the consequences of their actions. As a result, they may take greater risks than they would have otherwise.

Here are 6 examples of situations where Moral Hazards arise in practice.

1. Insurance

The provision of insurance is the most common example of Moral Hazard.

For example, if you have comprehensive private health insurance you’ll be more likely to visit the doctor. You may also engage in more risk taking activities because you are not responsible for paying the medical costs if things go badly e.g. you go bungy jumping and throw your back out.

Malcolm Gladwell provides the amusing example of Universal Pepsi Insurance:

“Moral hazard” is the term economists use to describe the fact that insurance can change the behavior of the person being insured. If your office gives you and your co-workers all the free Pepsi you want—if your employer, in effect, offers universal Pepsi insurance—you’ll drink more Pepsi than you would have otherwise.

2. Mortgage Securitisation

Mortgage securitisation is an insidious and often misunderstood example of Moral Hazard.

The US government, motivated by a desire to expand home ownership, has for many years actively encouraged bankers to make loans to people with poor credit ratings. Fannie Mae and Freddie Mac, two large government sponsored enterprises, have carried out this policy through a process known as “mortgage securitisation”. Mortgage securitisation involves:

  1. purchasing mortgages from banks and mortgage brokers;
  2. grouping these mortgages together into large pools; and then
  3. selling “shares” in these mortgage pools to investors.

Moral Hazard exists because the banks and mortgage brokers who originate the loans do not pay the cost if lenders default. As a result, they have an incentive to make as many loans as possible, even to people with extremely poor credit ratings. These loans are often referred to as NINJA loans because they are made to people with No Income, No Job and No Assets.

3. The Greenspan Put

The Greenspan Put is another example of Moral Hazard.

Since the late 1980’s the Federal Reserve has followed a policy of significantly lowering interest rates in the wake each financial crisis (this policy is often referred to as the Greenspan Put). Lowering interest rates has the effect of increasing the amount of money available to the economy which prevents the economy from deteriorating further and stops asset prices from falling. As a result, this policy encourages investors to take excessive risks because they know that the Fed will lower interest rates if things go badly.

4. Bank Bailouts

Following on from mortgage securitisation and the Greenspan Put, we arrive at bank bailouts.

The provision of bank bailouts by government is perhaps the most topical example of Moral Hazard. In 2008, in the wake of the sub-prime mortgage crisis, the US government created a US$700 billion Troubled Asset Relief Program (known as TARP) to buy financial assets from banks and other financial institutions. The bailout was intended to stabilise financial markets, make sure that credit markets remained liquid and to prevent a repeat of the great depression. A worthy goal, however one small problem with TARP is that it creates a big Moral Hazard. If banks know that government will bail them out, then they will continue to engage in excessive risk taking.

Bailouts are now even being provided to sovereign states. In May 2010, the EU and IMF agreed to provide Greece with bailout money to the tune of €110 billion.

We can expect more financial instability to come.

5. Private Equity

Private equity vehicles, popular until around mid-2007, are another example of Moral Hazard.

Let’s assume that investors give a private equity firm $100 million to invest. If the private equity fund makes a profit of $20 million after one year then the fund managers might take 20%, or $4 million. If the fund loses $20 million after one year then the investors lose $20 million and the fund managers pay nothing. Since the managers are not fully responsible for the consequences of their investment decisions they have an incentive to take excessive risk.

6. The Limited Liability Company

The limited liability company presents an often overlooked form of Moral Hazard (props to Stella Szeto for pointing this out).

A company will often link the amount that its executives get paid with the company’s performance on the stock market. The reason for doing this is to align the interests of the executives with the interests of shareholders, which makes sense on one level (see Principal-Agent problem).

If the company performs well and its stock price rises strongly then shareholders are happy and executives will get a bonus in the form of cash, shares and/or options. However, if the company performs poorly then shareholders lose, while executives still receive their base salary and are not required to compensate shareholders. As a result, executives have an incentive to take excessive risks in an attempt to inflate the company’s short term stock price.