Sirius XM Radio Adds 334,000 Subscribers in Third Quarter
Sirius XM Radio Adds 334,000 Subscribers in Third Quarter

SiriusXM Radio, via Music Reports Inc., is attempting to directly license music from record labels, bypassing SoundExchange, Billboard.biz has learned.

Currently, SiriusXM operates under a statutory license and pays royalties to SoundExchange.

In moving to directly license masters, the company is seeking expanded licenses that will allow for more functionality. For example, it wants to allow subscribers to record programming blocks and be able to rewind and fast-forward that segment. It also is seeking to allow music to be cached locally on devices and applications that have that capability. In seeking the former, it is in effect asking for a waiver from the sound recording performance complement of the Digital Millenium Copyright Act, which limits how many times songs from an artist can be played within an hour.

Those added capabilities apparently are meant to enhance SiruisXM's offering and to insure it retains it subscription base as new music services like Spotify and the cloud-based services come to market.

Moreover, Sirius will not allow subscribers to transfer music to other devices and won't allow them to access any cached or recorded programming blocks after the subscription expires.

In a letter to independent labels from Music Reports Inc., Sirius is offering to pay a royalty rate of 7% of gross revenues, which is less than the 7.5% it now pays to SoundExchange, although that organization deducts its overhead costs before turning around and paying out collected royalties. Next year, royalty rates are scheduled to increase to 8%, as set by the Copyright Royalty Board.

Next year, the Copyright Royalty Board will begin the process for setting rates from 2013-2018. "The last time they set a rate, the copyright board said an appropriate rate was 13%, but at the time Sirius and XM hadn't merged and weren't making money so they claimed financial hardship, which resulted in a reduced rate structure of 6.0%, 6.0%, 6.5%, 7.0%, 7.5% and 8.0% of gross revenues, subject to certain exclusions, for 2007, 2008, 2009, 2010, 2011 and 2012, respectively," says one executive in the independent label camp. "I certainly expect that CRB will set the rate higher than 8% for the next period."

Moreover, that executive says that with the expanded licensing, it sounds like it will have the same type of functionality as services that pay as much as 50% of revenue for licenses like Pandora. "Sirius wants to pay the statutory rate but waive the statutory license," he says.

To some, the Sirius move is similar to a play by Rhapsody earlier this year to pay "Pureplay" royalty rates rather than using the standard Copyright Royalty Board ("CRB") rates (set by a government tribunal). These Pureplay rates are approximately a 40% discount off of the CRB set rates and they are offered to Pureplay webcasters because of certain important concessions that these webcasters agree to that are important to independent labels and artists.

The MRI letter notes that direct licensing will afford "labels the opportunity of making more than they have made from SoundExchange under statutory licenses. This is due to...the absence of SoundExchange deductions from direct license royalties; and [SiriusXM's] expectation that, over time, it will increase its reliance on the use of directly-licensed recordings (as opposed to non-directly-licensed recordings) in its programming.

To some, the last part sounds like a veiled threat, i.e. "License directly or we'll stop playing your music." To others, the last part sounds like an incentive, i.e., "License directly and we will pay your music more," which means bigger payments.

Finally, that executive argues that people who listen to music from on-demand services tend to buy less music so the new functionality could result in some music sales cannibalization.

But another music industry executive argues that while Sirius pays at a much lower rates, its annual payments to the industry are much larger. Sources say that Sirius, which has 21 million subscribers paid about $150 million in royalties in 2010, while Pandora, with 80 million users, paid $69.4 million in royalties for the year ended Jan. 31, 2011, according to the company's prospectus on file with the SEC.

SoundExchange declined to comment.

A2IM has weighed in on the matter to a degree on its website, but declined to comment for this story.

In talking about the Sirius strategy, the website notes: "In general statutory licenses have been good for the independent music label community as statutory licenses insure that all music label copyrights, whether those of the major labels or those of independent labels or artists, are treated equally and paid the same rate amount for each stream (play) of that music. Under direct licenses there are cases where independents have received less than equitable rates."

"If SoundExchange pays well, and efficient and transparent, they have nothing to worry about," the industry executive told Billboard.biz.

For its part, SiriusXM issued a statement: "We've had a mutually beneficial partnership with the music industry for years and we welcome the opportunity to strengthen that relationship by entering into direct licenses with all record labels regardless of size. SiriusXM provides a unique opportunity for artists to be heard by a national audience of more than 21 million subscribers and nearly 40 million listeners. SiriusXM listeners have diverse listening interests that are not satisfied by other audio entertainment platforms and regard SiriusXM as an influential platform for new and established repertoire."

SiriusXM reported net income of $43 million on revenues of $2.82 billion in revenue for the year ended Dec. 31, 2010., according to its 10-K filing For the six month period ended June 30, 2011, it reported net income of $251.4 million on $1.5 billion in revenue, according to its 10-Q filing.

As part of its move to direct licensing, SiriusXM will pay the full royalty rate directly to the labels, as opposed to the way SoundExchange makes payments, splitting royalties evenly between the artist, which it pays directly, and the label. So labels that directly license their masters to Sirius would then be responsible for paying the artist royalty. MRI would provide a full accounting on a per song basis to labels.

The question then arises if the labels will pay the artist half the royalty, or 50%, they receive for each time a song is played, or will some labels choose to pay them their artists the regular royalty rate, which typically ranges between 15% and 20%. Even though most artist contracts call for a 50/50 split on revenue that comes from licensing, some independent and even major labels overlook that when dealing with revenues received from interactive-streaming services, and just pay a straight royalty rate. Moreover, as music moves toward a model where the main distribution channel involves licensing, contracts have been re-written at many labels, eliminating the 50/50 splits for certain kinds of licenses.

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