Business Matters: Inside SoundExchange's 2010 and 2011 Numbers
Business Matters: Inside SoundExchange's 2010 and 2011 Numbers

Labels and performing artists are seeing good growth from digital performance royalties these days. But could they do better?

SoundExchange, the performance rights organization for non-interactive digital music services like Pandora and SiriusXM, paid out $95.8 million in digital performance royalties to recording artist and record labels in the second quarter of 2012.

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Payouts of $204.4 million for the first half of 2012 put SoundExchange on track to easily top 2011's disbursements of $249 million. But the second-quarter payout was a noticeable drop from the $108.6 million the organization paid out in the first quarter. That record total, the only that has topped $100 million in a single quarter, was attributed to "data cleanup and technology overhaul efforts."

Collections are a different matter. SoundExchange collects statutory royalties and - generally, although there have been a few hiccups - pays out the royalties less a 5.3% administrative rate (as of its 2011 annual report). What it collects is highly dependent on what is paid by its two cash cows, Pandora - which reports earnings next week - and SiriusXM. That could change over time. And while rates is a fixed schedule for the time being, they could change drastically after the current rates expire after 2015.

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Pandora has been itching - some might say strategizing - to change how the Copyright Royalty Board sets the statutory royalty for webcasters. Pandora, which has no satellites, pays a relatively high royalty rate. Satellite radio service SiriusXM is able to pay a much lower performance royalty to SoundExchange. Parity, Pandora argues, would not only allow Pandora to pay the same as SiriusXM but would allow the Internet radio market to flourish with more companies and innovation.

It's an ironic argument, of course. Webcasting rates are already the bargain of digital music. Just ask any on-demand subscription service that pays a far greater share of revenue to rights holders - and large advances to boot. And because webcasters have the luxury of operating with a statutory license, services such as 8tracks and Songza can innovate on a relative shoestring while still competing with the bigger players. How many more webcasters would enter the market if rates were even lower? That's a difficult question to answer.

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But it's question worth asking. Internet radio has extraordinary potential to be more popular, innovative and influential in the music business. Take 90% of the expectations currently being placed on on-demand subscription services and place them on Internet radio. Just as radio is the every man's analog product, Internet product will be the every man's digital product.