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

Soundexchange Refutes Earlier Suggestions of Pandora and Sirius' Collections Percentages
Pandora and Sirius XM accounted for a large share of SoundExchange's 2011 collections of digital broadcast royalties. Some people say 90%. SoundExchange says the actual figure is "substantially below" 90%.

As Billboard.biz noted last week, Pandora paid an estimated $143.6 million to SoundExchange in 2011, or roughly 38.6% of SoundExchange's total 2011 collections of $371.9 million from 1,600 digital music broadcasters. That number was calculated using SoundExchange's just-released draft annual report and Pandora's financial statements.

Exactly how much did Sirius XM pay SoundExchange for its performance royalties in 2011? One estimate puts the figure at $200 million. Adding Sirius XM's $200 million to Pandora's $143.6 million comes out to about $343 million, or 90% of SoundExchange's total collections in 2011. But the actual number is known by only Sirius XM and SoundExchange, and SoundExchange is prevented by regulations from disclosing the actual amount.

Angus MacDonald, general counsel at Live365.com, located the $200 million figure in the Sirius XM complaint against SoundExchange and the Associated of Independent Music (A2IM) dated March 27, 2012. That complaint states "Sirius XM paid nearly $200 million in statutory royalties to the record industry" in 2011.

That brings up more questions. What constitutes "nearly" $200 million? Why was an exact figure not used in the complaint? Sirius XM's use of the word "statutory" to describe the $200 million paid for royalties implies payments to the three performance royalty organizations were excluded since publishers and composers are technically not paid statutory rates for public performances of their works.

SoundExchange remained quiet after the first round of stories broke about Pandora's share of SoundExchange's 2011 collections. But the second round of stories, which added Sirius XM's share of SoundExchange's 2011 collections, prompted a response from the organization "We are not able to publicly disclose the payments to SoundExchange from specific digital music services," began a statement provided to Billboard.biz. "However, we can say that the recent estimates we've read of satellite radio and Pandora payments constituting '90% of SoundExchange annual revenues' are incorrect - the real number is substantially below that."

So why aren't everybody's numbers in sync? SoundExchange blames it on "using public sources that rely on different assumptions, estimates, and other factors." Indeed, the complaint against SoundExchange and A2IM does not contain an exact number. Another factor is the complexity and opacity of Sirius XM's royalty calculation. The statutory rate of 7.5% of gross revenue is not applied to top-line revenue found in the company's financial statements. Using numbers in Sirius XM's 2011 annual report, 7.5% of Sirius XM's $3.01 billion of revenue in 2011 is $226 million. Subscription revenue, which excludes advertising and hardware revenue, was $2.6 billion, and 7.5% of $2.6 billion is $194.7 million. A small amount of royalties related to revenue at XM Canada, of which Sirius XM owns 21.5%, should also be excluded.

But Sirius XM probably paid out even less because a host of exclusions lower the amount of gross revenue used in these calculations. For the purposes of royalty calculations, Sirius XM's gross revenue excludes not just advertising revenue but also subscription revenue associated with channels that use only incidental performances of sound recordings, according to the Copyright Royalty Board's Final Determination of Rates and Terms. In other words, the revenue that comes from Sirius XM's sports and talks shows does not trigger a music royalty obligation. The exact number used for gross revenue in royalty calculations is not known, but excluding just 15.1% of revenue (the share of sports, news and talk radio in fall 2010, according to Arbitron) would decrease Sirius XM's payment to SoundExchange by $30.2 million.

The 90% figure floating is enough to give people the impression Pandora and Sirius XM have leverage over SoundExchange in upcoming royalty negotiations. MacDonald certainly believes that to be the case. "These figures suggest that Sirius XM and Pandora have a good amount of leverage to extract a fair royalty deal from SoundExchange for their respective royalty proceedings in the Copyright Royalty Board," he wrote in an email to Billboard.biz.

But then again, Pandora and Sirius XM may appear financially strong enough to merit continued rate increases after the current rate agreement ends in 2015. In any case, SoundExchange chose to highlight the increasingly diverse market of digital music broadcasters. "The music industry continues to evolve, with more services offering consumers even more ways to experience digital radio, and digital radio services continue to gain popularity. That's what the industry should be focused on."

Splash.fm Gets A Facelift, Goes Beta
Splash.fm, a social music service, has debuted some updated features and is now in public beta mode. The site works something like Twitter for music. People post songs to the site that can be "splashed," or shared, by other users. The most popular tracks are the ones that have been splashed the most times.

The numerous updates make the browsing and listening experience better than before. There is a new search function as well as filters for viewing the most "splashed" songs of the last 7 day and all-time. A comments section has been added and the site now highlights "featured splashers" with verified accounts such as DJs, artists and brands. In addition, the company says it plans to roll out a mobile app in a few months but has not set a hard date for release.

Questions? Comments? Let us know: @billboardbiz

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