CRB Imposes Royalty Increases for Sirius XM
Sirius XM’s share price rose slightly Monday, nearing a 52-week high, after a Copyright Royalty Board (CRB) decision imposed only slight music royalty increases through 2017. An analyst said the increase was less than he expected, while another said it was a good outcome for the satellite radio company. Sirius’ stock closed Monday up one cent at $2.92.
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Sirius currently pays 8 percent of annual revenue as a royalty to SoundExchange, which represents music companies and musicians. The rate new rates start at 9 percent of gross revenue in 2013 and continue in 2014 (9.5 percent), 2015 (10 percent), 2016 (10.5 percent) and 2017 (11 percent), the CRB ruled. SoundExchange had sought substantially higher increases, starting at 12 percent next year and rising to 20 percent in 2017. The decision also requires a minimum annual advance fee payment of $100,000, CRB said (http://xrl.us/bn6wr7).
The CRB’s decision was “nicely better than our conservative expectations and well below the music industry’s asking price,” said the analyst who'd expected a higher increase, Jeff Wlodarczak of Pivotal Research Group. “We view this as a nice positive for Sirius,” he wrote clients Monday. Wlodarczak increased his target price for Sirius stock by 10 cents to $3.55. SoundExchange officials weren’t available for comment. SoundExchange and Sirius have 15 days from the Friday decision to seek a rehearing, Sirius XM said. Sirius and SoundExchange also will have 30 days from the CRB’s final decision being published to file an appeal with the U.S. Circuit Court of Appeals in Washington.
Sirius XM, which had been in discussions with SoundExchange for much of this year as a five-year agreement expired, held out little hope of reaching a settlement in advance of a CRB decision. Sirius Chief Financial Officer David Frear said Dec. 3 that there was a “long history” of “nonsensical” negotiations between the satellite radio service and SoundExchange (CD Dec 4 p9). Sirius hasn’t indicated whether it would boost subscription fees to partly offset a royalty rate increase. Frear has maintained that increasing prices ought to be avoided given that the company competes with a “free-to-consumer” product.
"I'm not sure this is what either SoundExchange or Sirius XM wanted, but I think it is what they expected,” said Kevin Goldberg, a communications lawyer at Fletcher, Heald, which represents broadcasters. While there is always room for adjusting the royalty rates following the CRB’s decision, the likelihood that there will be changes is remote given the CRB’s rate-setting history, Goldberg said.
The revenue subject to royalty includes that from subscriptions and ads on those channels that make only incidental performances of sound recording. Excluded for the royalty are those channels that are available for a separate charge and revenue from hardware sales and future data services, including video, Sirius said. It also can reduce its monthly royalty fee “in proportion” to the percentage of performances featuring pre-1972 recordings, which aren’t subject to federal copyright regulations, Sirius said. Recordings licensed directly from a copyright holder also aren’t subject to royalties, Sirius said. Sirius XM, emboldened by an increasing subscriber base and financial strength, has moved during the past year to cut more direct deals with music holders for lower royalty rates, analysts said.
While some analysts speculated that the CRB ruling could have implications for Internet royalty rate-setting bills in Congress, Goldberg said the board’s decision in Sirius XM/SoundExchange case will have “literally no” impact. The rate-setting used for Sirius XM and those being proposed for Internet music services like Pandora involve “different methodologies,” Goldberg said. Rep. Jason Chaffetz, R-Utah, has introduced the Internet Radio Fairness Act (HR-6480) that is proposed to level the playing field by putting services like Pandora under the Copyright Act Section 801 (b) standard. The IRFA would change the legal standard by which judges determine the rate for streaming radio. The royalty rates for most other uses of copyright sound recordings uses standards set in 801(b). The 1998 Digital Millennium Copyright Act made an exception for Internet radio, requiring rates be set to what judges felt was a hypothetical “willing buyer and seller” would agree. The IFRA would bring Internet radio in line with cable and satellite radio.