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How the Music Industry is Fighting Online Fraud

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Shifting trends in online habits mean the music industry has become exposed to the phenomenon of "click fraud," and one expert suggests the threat will only grow over the coming years.

This type of fraud happens typically when automated "bots" imitate human online browsing by repeatedly clicking on a web page, incentivized by a pay-per-click business model. Fraudsters have found a new target in music streaming sites like Spotify and Deezer. Many music streaming sites pay out royalties to artists and songwriters, who are rewarded each time someone listens to their track.

The bots masquerade as fake artists and create fake tracks, often mimicking tunes from established artists. The bots then repeatedly play the audio streams, generating revenue with each click. The fraudsters use multiple Spotify accounts in the hope of remaining undetected, according to Rich Kahn, the CEO of eZanga.com, an online advertising agency that provides protection against digital fraud.

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"It's just getting started in this area," he told CNBC.

'Only going to get worse'

Click fraud in general is reportedly a $10 billion a year industry, although there are no statistics detailing the effect on the music streamers. Kahn explained that programmers were developing sophisticated tactics to stay "under the radar" of police organizations like Interpol.

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"It's only going to get worse if people don't police it," he said. "Online fraud used to focus on banks ... but banking has gotten tighter. They are looking at other areas."

Spotify -- the most prominent music streaming site -- has an algorithm in place that looks at various factors that may indicate artificial listening habits. This includes the excessive streaming of content by a small number of users. It removes any content that is seen to have artificially manipulated streaming activity.

"We are constantly developing our algorithms to make them smarter, and to make sure that we are only stripping out artificial or manipulated streams," a spokesperson for the Swedish company told CNBC via email.

Proving a point

While this type of activity is deemed illegal, there are other types of behavior that are a form of protest against the meager royalties paid to artists. High-profile examples include the Michigan-based band Vulfpeck, which reportedly made $20,000 by asking fans to listen to its album that contained ten tracks of complete silence.

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Another U.S. band, Ohm & Sport, created an app called Eternify during the summer of 2015 that let users listen to music on recurring 30-second loops, thus triggering royalty payments from Spotify.

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"Whether it's Spotify or any other service, streaming payments only benefit artists with a massive number of listeners. This has long meant that success in music streaming is slanted toward major artists," Ohm & Sport members Henry MacConnel and Lukas Bentel told CNBC via email.

Spotify contacted the band, and the app -- which had reached users from 140 countries in three days -- was discontinued as it breached it terms of use. However, Ohm & Sport say that the company has introduced curated playlists on its app that it says help smaller artists to gain some traction.