SoundExchange Is Now Trying to Double Sirius XM’s Royalty Obligations

The question isn’t whether artists deserve to be paid.

It’s whether companies that are more than willing to pay are being asked to burden royalties that will either kill them, or force them to adopt extreme licensing and programming alternatives.

The sad part is that the recording industry seems determined to milk this cow to death. The majors are notorious for prying unworkable advances that ultimately suffocate well-funded startups, and SoundExchange – a former label appendage – seems determined to ratchet royalties as high as humanly possible.  That is, irrespective of market forces, and at the risk of accelerating adoption of licensing alternatives that would greatly reduce the need for SoundExchange itself.

The latest developments reaffirm this assessment.  According to details tipped by investment journal Seeking Alpha, SoundExchange is now pushing for royalty rates that would run as high as 20 percent of total Sirius XM Radio revenues by 2017, up from roughly 8 percent currently.  So, more than double the current rate and a dramatic increase from current levels.

Immediately, Sirius is pushing for something in the range of 5-7 percent, while SoundExchange wants a schedule that immediately starts at 13 percent and escalates to the 20 percent marker.  These rates are negotiated and determined by the Copyright Royalty Board (CRB), in processes that are complicated, time-consuming, and often produce inflexible results (but great for lawyers and bureaucrats).  And according to details shared by Sirius, the resource and time costs required to arrive at these rates are stunning:

Both Sirius and SoundExchange participated in the CRB proceeding that set the statutory rates for the 2007-2012 license period. That proceeding involved over 26 trial days, 230 exhibits, 7700 pages of transcripts, and over 400 pleadings, motions and orders. … In a lengthy written opinion affirmed by the D.C. Circuit, the CRB set the rate for 2007 at 6% of a satellite radio provider’s gross revenues, rising each year to 8% in 2012.

And if all this seems ludicrous to Sirius, it’s absolute insanity to Pandora, whose royalty obligations represent roughly 60 percent of total revenues.  These are two of the largest streaming music services on the planet, and as you’d expect, both are taking affirmative action to fix the situation.  Pandora – seemingly mired in permanent financial losses – is stumping to change royalty rates on Capitol Hill, while Sirius is moving aggressively to strike direct licenses with various labels and largely diminish SoundExchange’s role in the process.

But don’t whip out a violin for Sirius quite yet.  The company now has considerable free cash flow, and is one of the largest entertainment subscription services on the planet.  Which means they can probably afford it, but like most corporations, are uninterested in any massive cost increases and will fight them aggressively.

Which brings us back to direct licensing.  The acrimonious backdrop in all of this also involves a major lawsuit from Sirius against both SoundExchange and A2IM, both of whom are accused of scuttling Sirius’ direct licensing attempts.  The technology now exists for one-to-one, direct-licensing arrangements, including accommodations for innovative uses like time-shifting and tethered storage.  Those aren’t permitted in more generic SoundExchange licenses, and starting in 2011, Sirius partnered with Music Reports, Inc., to craft individual deals that would eliminate the middleman and allow for a broader range of uses.

And, reduce a bureaucratic morass at SoundExchange that takes the form of massive unpaid balances and failures to distribute to many of the largest of artists alive.  Sadly, a large chunk of collections never make it back to the artist, a situation that would only be exacerbated by increased royalty amounts.

14 Responses

  1. Avatar
    Dave

    All good and valid points, but let’s not forget that all these new “tech/internet” music companies have absolutely no business model whatsoever without content and that content is 100% music. A valid argument could be made that 20% is not large enough, seeing as how these companies exist solely on readily available cheap content. Take that away and they have nothing. What good is a widget company without any widgets…?

    • Avatar
      Casey

      In the case of Pandora that is true. But SiriusXM delivers a lot more content than just music. In fact I don’t know anyone who subscribes for the music. They listen to the music, but subscribe for other reasons.

    • Avatar
      MR

      The argument that “digital cos wouldn’t have a business without the content” is really a silly one. TV cos wouldn’t have a business without actors so they deserve 80%. And actors wouldn’t have a live without food so food producers deserve 80%. And food producers wouldn’t have a business without water so water co deserves 80%. This is just an illogical argument. Yes, there dependencies but that doesn’t necessarily dictate economic terms.

      • Avatar
        Dave

        Scratching my head at that response. Networks pay handsomely for shows from producing studios. Studios pay writers, actors and directors to deliver entertainment. Farmers pay for land, seed, water and harvest equipment. The argument goes on and on…businesses pay for the raw materials to produce their widgets. If you make the assumption that this is analogous to Pandora/XM/SoundExchange/etc. then all these businesses could be thriving simply by picking up their raw materials for little or nothing just because they are “lying around”. Or just stealing their neighbors stuff, for that matter. Clearly in real world, this doesn’t fly. All these digital music services are groaning because paying for content cuts into their bottom line. You don’t see that in other businesses – try opening your own movie theater chain and charge for playing your DVD collection and see what happens. Or charge your friends for copies of your Windows OS discs…

  2. Avatar
    The Insider

    PR,

    Truth be told, until SE drops the “come find us and we’ll pay you” attitude and instead works proactively to develop, streamline and implement better solutions for tracking repertoire, accounting and payments to both the SRCO’s and artists alike, this WILL remain an ongoing. issue and become a whole lot worse. MRI is clueless as to what they are talking about or doing exactly. SXM choosing to hop into bed with them only means they’ll end up with fleas or another settlement offer. LOL.

    While many of the artists on the list referenced above may be aware they have $$$ sitting at SE, they choose to ignore it for a myriad of reasons, i.e., child support issues, tax issues, judgements, liens, alimony. The list goes on and on. In other words, DNCOPM!

    As Pete Rock once said “Record labels always have artists royalties laying around somewhere”.

    As do SE and SXM

  3. Avatar
    Visitor

    Dear SoundExchange,

    why isn’t SOMA FM submitting playlists to you and why aren’t you asking for them?

    They got them on their website, it can’t be that hard to export an XML or CSV file?

    • Avatar
      Really?!

      That’s a bad surprise from a station that likes to present itself as “geek radio”…

  4. Avatar
    John Simson

    Paul:

    Sirius/XM would like to pay as little as possible for the product that drives over half of their subscribers to spend $12 per month and drives revenues of nearly $3 Billion per year. What was XM and Sirius’ initial offer back in 2007? Less than 1%. In fact, they were offering all of the artists and record companies on 70 channels of music, less than they were paying Howard Stern’s manager! Not Howard, his manager. That doesn’t exactly scream wanting to pay artists and labels fairly.

    Paul, once again your rants are misplaced: the statutory license is horrid for lawyers and bureaucrats but great for music services. They don’t need to hire expensive lawyers to negotiate time consuming deals with every single copyright owner and every single artist. In fact, they simply send a notice to the Copyright Office, find the right license type at SoundExchange and they can stream any recording ever released without anyone else’s permission.

    And it’s exactly because no artist or label can opt out and say I don’t want you to play my music, that the rates for those services better be a market rate – a fair rate for the use of music that drives the revenues of those services.

    Sirius/XM’s direct licensing campaign was a stunt to prove to the Copyright Royalty Board that labels would accept less than the statutory rate while giving away greater rights. Don’t blame the labels for being smart enough to know that you don’t take less when someone is asking for more rights. Oh, and the cynical part of MRI’s play was: “you wont have to split this money with your artists.” Direct licenses go only to the label. If the artist is unrecouped, no money flows there. Paul, after all of your articles on what artists get paid, how did you miss this part of the equation?

    History is replete with example after example of new technologies that wanted to use content to drive their sales while paying as little as possible to use it – many paid nothing and many still pay nothing. Don’t blame artists and labels for trying to extract fair market rates from those who use their music.

    Thanks,

    John

    • Avatar
      Visitor

      John,

      I can’t begrudge Sirius for wanting the lowest royalty rate, just as I can’t begrudge SoundExchange for wanting the highest rate. That’s the negotiation process, and healthy up to a point. The question I’m posing is whether overly aggressive – and successful – moves for higher rates force services like Sirius to pursue drastic, alternative licensing options that steer as far away from SoundExchange as possible. I’d argue this is exactly what is transpiring in the current scenario, and a very real threat for ‘partner’ Pandora as well in the future.

      Take Sirius and Pandora out of the equation, and SoundExchange doesn’t have much to do. I’m not sure whether going to war with these companies makes sense given that situation.

      I’d say that SoundExchange also has a very serious disruption to consider here. The future is now: technologies can now handle direct licensing between the content provider (ie, label) and service (Sirius, Pandora, whomever). A company like MRI specializes in this, though there are others that want a piece of this future. Whether we need a large, bureaucratic organization to collect and redestribute these funds in a relatively inefficient manner is highly debatable moving forward.

      So, is Sirius priming a gigantic publicity stunt, as you accuse? Maybe, though this seems like a seriously complicated endeavor. After all, Sirius has partnered and secured the services of MRI, they’ve approached various labels with proposed terms, they’ve outlined usage flexibilities they’d like to enjoy with direct licenses, and they’ve even filed a lawsuit against SoundExchange and A2IM alleging interference. That’s quite a publicity stunt, and this is the first time I’d heard this accusation.

      Maybe, but I’m skeptical.

      I’d also question whether SoundExchange is really doing artists a favor with its 50/50 split structure (after costs). Sure, labels are great at hording cash and only sometimes paying their artists -they are part of the problem. Then again, SoundExchange seems to be having massive problems distributing these funds in the first place. We’re talking about $100 million, $200 million-plus sitting on balance sheets (with varying explanations every time), collecting interest and helping SoundExchange but few others.

      On top of all this, there are dozens of extremely high profile artists that are not getting paid as well, artists like Skrillex. Maybe there’s also a great explanation for that as well, but I’d hate to see a bankrupt, delisted Pandora while SoundExchange is sitting on hundreds of millions in unpaid royalties, much of it collected from Pandora itself.

      I look forward to your response.

      Paul

      • Avatar
        Terrestrial

        Isn’t part of Sirius argument that most of its competitors (terrestrial broadcast radio) dont pay much in the way of royalties? There is a level playing field issue here perhaps.

        Why is ok for terrestrial radio to pay low royalties when their business is ‘all about music’ too? Where is the artist outrage on this topic?

  5. Avatar
    Anon.

    I think one thing should be made clear here. Sirius is not going to be “killed” and 20% is not “unworkable” for them, etc. Sirius is very profitable. Perhaps 8% was reasonable when the company was just starting, but now it is a stable cash cow.

    In a scenario like this where free market negotiation is impossible, I think it makes sense that Sirius pay a fair rate for their content. And 8% is too low given how incredible profitable the company is.

    Pandora is a different story.

  6. Avatar
    I know it when I see it

    Anyone who gets into a business where the price of the only product you sell is set by an arbitration panel is a fool

  7. Avatar
    Jesse Nash

    “But don’t whip out a violin for Sirius quite yet. The company now has considerable free cash flow, and is one of the largest entertainment subscription services on the planet. Which means they can probably afford it, but like most corporations, are uninterested in any massive cost increases and will fight them aggressively.”

    It’s obvious the writer of this article has a negative bias toward SIRI or why write the above? Just because the company is doing well and has lots of free cash flow doesn’t diminish the fact that Sound Exchange are getting incredibly greedy! Another part of this greed, as written in the story, which should have artists protesting as much as SIRI and Pandora, is that many artists allegedly never see these huge royalty fees Sound Exchange collects! Just because a company can afford to pay higher royalty fees doesn’t mean the principles in asking for this royalty fee increase is based in anything meaningful. No company should be stopped from going direct. This is America damn it. Free enterprise. Sound Exchange needs to be stopped and they will. That’s my bet.

  8. Avatar
    Cliff Baldwin

    There is tremendous demand for streaming music. Pandora has over 125M registered and 60+M active. Apple recently announced some very big number of people using iTunes in the Cloud which is effectively streaming one’s own music collection to all devices. I think the number is over 100M active. There is money to be made here, artists to be discovered, and fans to surprise and delight. But until these tech companies figure out that they can’t look a gift horse in the mouth and work *with* the music companies and rights holders, it’s all going to be begruding blood money changing hands. A greedy competition for dollars with no winner. And until the record companies stop treating fledgling businesses like Pandora as cash cows to be exploited until they are bled dry, they will be the gift horse bucking and throwing its own riders. Meanwhile, kids happily stream 2 hours of YouTube a day, getting every song, every artist, and at least highlights from every concert for free via YouTube playlists. Yes folks, there is a minimize button. It is not your friend. Mutually assured destruction. That’s the strategy.