The Kobalt EC-1, Part IIBacked by over $200 million in VC funding, Kobalt is changing the way the music industry does business and putting more money into musicians’ pockets in the process.In Part I of this series, I walked through the company’s founding story and its overall structure.

There are two core theses that Kobalt bet on: 1) that the shift to digital music could transform the way royalties are tracked and paid, and 2) that music streaming will empower a growing middle class of DIY musicians who find success across countless niches.This article focuses on the complex way royalties flow through the industry and how Kobalt is restructuring that process (while Part III will focus on music’s middle class).

The music industry runs on copyright administration and royalty collections.

If the system breaks — if people lose track of where songs are being played and who is owed how much in royalties — everything halts.Kobalt is as much a compliance tech company as it is a music company: it has built a quasi “operating system” to more accurately and quickly handle this using software and a centralized approach to collections, upending a broken, inefficient system so everything can run more smoothly and predictably on top of it.

The big question is whether it can maintain its initial lead in doing this, however.The business of a songImage via Getty Images / Mykyta Dolmatov