SiriusXM

Fueled by Pandora's, SiriusXM's growth, SoundEx payouts up 58% from 2011

Thursday, January 17, 2013 - 12:45pm

SoundExchange -- the record industry body that collects and distributes royalties for the digital use of copyright sound recordings -- passed along $462 million to labels and performers last year. That's 58% higher than 2011 ($292 million).

When Internet radio, satellite radio, or cable television radio in the U.S. plays copyright sound recordings, they pay a royalty for the use of that music. Not only to the songwriters and publishers (as broadcasters do), but also to the recording copyright owners (labels) and performers on the recordings. SoundExchange is the group that administers the latter.

Billboard explains, "The growth of this revenue stream underscores the importance of services such as Pandora -- and other webcasters -- and Sirius XM Satellite Radio in today's digital marketplace. Pandora, which supported the Internet Radio Fairness Act that could have led to a change in webcasters' statutory royalty rates, finished 2012 with 67.1 million active listeners, up 41% from 2011. Sirius XM added 2 million subscribers to finish the year with 23.9 million."

Pandora and SiriusXM pay the lion's share of SoundExchange royalties (some say as much as 90%).

Read more in Billboard here.

Oxenford reports CRB gave some consideration to SiriusXM marketplace deals in determining rates

Monday, January 7, 2013 - 11:15am

The recent CRB royalty decision for satellite and cable radio "for the first time, gives at least some weight to direct licensing deals," and "seems to reject some premises that had long been used to justify royalty rates in other proceedings – and thus may give some insights on approaches to be used in the webcasting royalty proceeding."

We're quoting industry legal expert David Oxenford, who has published some preliminary analysis of the Copyright Royalty Board's full determination of royalty rates to be paid to SoundExchange by Sirius XM and Music Choice from 2013 through 2017.

Last week the CRB released its full decision (actually, two separate decisions, resulting in the same determination, here and here). We reported the actual rates last month in RAIN (here).

We also reported (here) that in the proceedings, satellite radio provider SiriusXM revealed more than 60 direct licensing deals it had secured with record labels, which it argued should be used as benchmarks as the market value of digital sound recordings for noninteractive performance. The service says its direct deals are for 5%-7% of revenues.

Logically, the CRB agreed that directly-licensed sound recordings should be excluded from SiriusXM's royalty obligation to SoundExchange (services need pay SoundExchange only for copyright music for which they have not secured direct deals), Oxenford reports.

And while the CRB rejected SiriusXM's proposal to lower rates from 8% of revenue to 5%, it also rejected SoundExchange's proposal to raise rates -- starting at 12% of revenue in 2013 and ending at 20% in 2017. The Board decision -- 10% of revenue this year, rising to 11% next year, and 12% for each of the next three years -- might indeed indicate it took SiriusXM's market deals into consideration, as Oxenford suggests.

This is important to note as we approach CRB proceedings on Internet radio royalties. Broadcasters like Clear Channel and Entercom have struck streaming royalty deals with certain copyright owners. If the CRB is willing to consider marketplace deals in royalty determinations for satellite and cable radio, they may also be willing to do so in the upcoming webcasting proceedings.

The fact that webcasting royalty proceedings are governed by the controversial "willing buyer willing seller" standard, which by design attempts to replicate an "open market" value for copyright material, may be even more reason for royalty judges to consider these direct deals as benchmarks.

[Satellite radio and cable radio royalty proceedings are governed by the more traditional 801(b) standard. The main goal of the Internet Radio Fairness Act is to have Internet radio royalties to be moved to this same standard.]

The next royalty proceeding for noninteractive webcasting services begins in 2014 and should conclude in 2015.

Oxenford also reports that "the Board also explicitly agreed, for the first time in any decision of which we are aware, that pre-1972 sound recordings also are not to be included in the revenue base, as the Federal sound recording copyright only applies to songs created in 1972 and after (with certain exceptions...)." It will be interesting to see if webcasters are given a similar "pre-1972 carve-out."

Oxenford plans to follow up with more detailed analysis. Read his initial thoughts here.

SiriusXM direct licensing deals may make it harder for SoundEx to claim CRB is "below market"

Tuesday, December 18, 2012 - 1:30pm

During testimony in the recent royalty determinations (see yesterday's RAIN here), SiriusXM reportedly revealed it has secured "direct content licenses" with more than 60 labels, giving them even broader use rights at rates below those set by the Copyright Royalty Board.

Digital Music News reports SiriusXM will pay 5%-7% of its gross revenues for these licenses, covering more than 7,000 artists, 9,000 albums, and 110,000 songs (there were no reported details of how specifically the use of the licensed music is broader than is allowed by the statutory license).

These agreements are actual, real-world settlements between active players in the music rights market. As such, these deals (both the rates and expanded allowable uses of the music) will likely be cited in arguments against music industry interests who claim the CRB-determined rates for satellite radio (and webcasting, for that matter) are "below market value." It isn't clear whether the more favorable terms of these direct deals tempered the CRB's decision

As we reported yesterday, the CRB set sound recording royalties for satellite radio at 9% of gross revenue in 2013, increasing 0.5% each year (to 11% in 2017). Billboard estimates SiriusXM will pay between $1.02 billion and $1.22 billion in statutory royalties to SoundExchange from 2013 to 2017.

Hypebot reports SoundExchange pressed the CRB for satellite radio royalties that increased to 20% of gross revenue by 2017 (DMN says "one resident expert" pushed for 30%), calling the CRB rates "below market."

Last month industry attorney David Oxenford reported that much of the discussion in the rate-setting's oral arguments phase "focused on the value of music in a marketplace -– essentially the 'willing buyer, willing seller' question." Currently, the law mandates that the rate-setting for royalties for these media is to be governed by the "801(b)" standard (which the record industry has argued does not reflect fair market value) (RAIN coverage here).

In March Sirius XM filed a lawsuit against SoundExchange and the American Association of Independent Music (A2IM), accusing the record industry organziations of interfering with its efforts to directly license sound recordings. The complaint accuses SoundExchange and A2IM of being in violation of federal antitrust law, and New York state law (RAIN coverage here).

Digital Music News coverage is here. Read Hypebot here. Read Billboard coverage here.

Karmazin says Net radio business needs "a whole lot more commercials"

Friday, November 2, 2012 - 11:10am

SiriusXM CEO Mel Karmazin called ad-supported customizable Internet radio "a race to the bottom in terms of business model," as the quality of the user experience depends on a low spot load.

Karmazin, who announced last week he'll step down as SiriusXM CEO in February, spoke on his companies Q3 earnings call yesterday (his comments were reported by Billboard.biz).

"Those companies (ad-supported, personalized webcasters, such as Pandora) which can grow users and provide good customer experience usually have the worst business models," he said. He said fixing their businesses would take "a whole lot more commercials, and that means harming the customer's experience."

It will be interesting to see if SiriusXM puts Karmazin's idea into practice when the company launches its own online custom radio, which he promised it will by the end of the year.

"Not because we think it's a good business," he qualified, but because customers want it.

Read more in Billboard.biz here.

CRB oral arguments on SiriusXM rates veer away from 801(b) and toward "marketplace" evidence

Thursday, November 1, 2012 - 1:30pm

Satellite radio provider SiriusXM, cable radio provider Music Choice, and music industry royalty administrator SoundExchange recently made their oral arguments before the U.S. Copyright Royalty Board on the matter of sound recording royalties for their next 5 year term (more in RAIN here). And while the law mandates that the rate-setting for royalties for these media is to be governed by the "801(b)" standard, industry legal expert David Oxenford reports the actual argument that took place "focused on the value of music in a marketplace -– essentially the 'willing buyer, willing seller' question."

Oxenford reports that "while other 801(b) factors were discussed, they were seemingly passed over quickly, with most of the focus being on the questions of the marketplace value of the music."

SiriusXM themselves used as evidence the direct licensing deals it has negotiated with dozens of record labels and artists as a benchmark for "the true marketplace value of music," Oxenford notes. "Sirius argued that these deals showed the true marketplace value of music, as they were negotiated outside of the royalty process by a willing buyer (Sirius XM) and willing sellers (the labels)."

What Oxenford is pointing out here is that even when the 801(b) standard is mandated for royalty-setting, there's no guarantee that judges won't use the marketplace precendents of "willing buyers and willing sellers" in their determinations.

Here's why this is important: Currently, the law requires copyright judges, when determining royalty rates for all forms of digital radio except Internet radio (and HD Radio, which pays no such royalty), base their decisions on the objectives of the 801(b) standard (named for its location in the Copyright Act). Those objectives are:

(A) To maximize the availability of creative works to the public. 
(B) To afford the copyright owner a fair return for his or her creative work and the copyright user a fair income under existing economic conditions.
(C) To reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication.
(D) To minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.

As Oxenford has explained (here), "In setting royalties, 801(b) assesses not only the economic value of the sound recording, but also the public interest in the wide dissemination of the copyrighted material and the impact of the royalty on the service using the music."

Judges use a different standard when they set rates for Internet radio. Instead of 801(b), the Digital Millennium Copyright Act requires judges to determine a rate based on what a "willing buyer" and "willing seller" might agree to in the marketplace. But no significant real-world examples of "willing buyer willing seller" agreements between webcasters and copyright owners exist. So judges are compelled to imagine a hypothetical marketplace based on the arguments of advocates for copyright owners and users to determine a rate. They do not (and in fact, are instructed to not) consider how their decisions affect the return on players' investments in the industry, or the public's access to creative works, only the perceived economic value of the right.

The bottom line result of using these two different standards: while royalties for SiriusXM are currently about 8% of its revenue, Internet radio royalty rates amount to 50%-100% of revenue (Pandora's latest finances would have them paying 70% of their revenue) or more.

The Internet Radio Fairness Act (more in RAIN here), a bill in both houses of Congress, would attempt to address this discrepancy by changing the Internet radio rate standard from "willing buyer willing seller" to "801(b)," the same standard used for satellite- and cable-radio royalties. If the IRFA is adopted, it would apply when the CRB next reviews webcasting rates in a case that will be decided by the end of 2015.

But, as Oxenford notes, "the (SiriusXM) oral argument made clear that the adoption of the 801(b) standard is not in and of itself a panacea for the concerns about the royalties that have been set by the Copyright Royalty Board."

Read Oxenford's report in the Broadcast Law Blog here. David Oxenford is a Washington, D.C.-based partner at Wilkinson Barker Knauer, LLP. He represents digital media companies, including a number of Internet radio companies, before the Copyright Office, the Copyright Royalty Board, and other government agencies. He advises them on music royalty issues as well as other general business and regulatory matters. He's a regular expert speaker at RAIN Summit events, and a regular contributor to this publication.

IRFC's main mission to support passage of Internet Radio Fairness Act

Thursday, October 25, 2012 - 6:45pm

Radio and webcasting organizations like Clear Channel, Pandora, and Salem, along with other industry parties like the Consumer Electronics Association, have today announced the formation of the Internet Radio Fairness Coalition.

The group formed to lobby Congress to pass the IRFA, or Internet Radio Fairness Act of 2012, which (among other measures) would require the same legal standard be used for determining sound recording royalty rates for all non-interactive digital music services.

The IRFA is a bill in both houses of Congress, H.R.6480 and S.3609. The bills were introduced by Reps. Jason Chaffetz (R-UT), Jared Polis (D-CO), Darrell Issa (R-CA), and Zoe Lofgren (D-CA) in the House and Sen. Ron Wyden (D-OR) in the Senate.

"We believe that market-based solutions are the way to go," said Bob Pittman (left), CEO of Clear Channel. "But in the absence of these agreements, the CRB needs to have and consider more relevant information so they are better able to develop a rate structure that will lead to a healthy, sustainable Internet radio marketplace. This will enable artists to earn more and connect more with their fans, consumers to have more choices, and entrepreneurs to invent and invest in new services."

Currently, government arbitrators base royalty rates for satellite and cable radio using a legal standard called 801(b). It requires the judges to consider how their decision would affect the industry and the public's access to copyright, as well as take into account the investment made by both copyright owners and licensees. Internet radio's royalties are based on the controversial "willing buyer / willing seller" standard, which does not take into account the concerns of 801(b). Rather, judges are instructed to set a rate they think a hypothetical "willing buyer" and "willing seller" would agree to in the marketplace.

The existence of different standards for different forms of radio has led to a situation in which satellite radio operator SiriusXM pays about 8% of its revenues for the use of copyright sound recordings, while webcasters are faced with obligations of 50% to more than 100% of their revenues. As an example, leading webcaster Pandora will pay nearly 70% of its revenue (based on Q1 FY 2013) for sound recording royalties.

"Legislation that establishes a fair royalty rate setting-standard for Internet radio will drive investment in webcasting, which ultimately offers greater opportunities and more revenue for working artists," said Pandora Founder and Chief Strategy Officer, Tim Westergren (right). "Internet radio has been shown to help decrease music piracy and increase music sales. When the digital music sector is allowed to grow and innovate, everybody wins."

Other founding members of the Coalition include 977 Music, AccuRadio, the Computer and Communications Industry Association (CCIA), Digital Media Association (DiMA), Digitally Imported, Engine Advocacy, National Religious Broadcasters Music License Committee (NRBMLC), Radio Paradise, and the Small Webcaster Alliance (SWA).

The Internet Radio Fairness Coalition has launched a website at InternetRadioFairness.com.

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